Caledonian Tst. Regulatory News (CNN)

20 Dec 2007 10:07

Caledonian Trust PLC20 December 2007 Caledonian Trust PLC20 December 2007 For immediate release 20 December 2007 Caledonian Trust PLC Results for the year ended 30 June 2007 Caledonian Trust PLC, the Edinburgh based property investment holding anddevelopment company, announces its audited results for the year to 30 June 2007. Chairman's StatementYear ended 30 June 2007 Introduction The Group made a loss of £244,153 in the year to 30 June 2007 compared with aprofit of £129,509 last year. The loss for the year comprised a loss of£398,584 for the six months to 31 December 2006 and a profit of £154,431 for thesecond half of the financial year. The loss per share was 2.05p and the NAV pershare was 223.1p compared with 222.5p last year. Income from rent and service charges was £684,085 compared with £870,745 lastyear, the reduction being principally due to the loss of the £125,000 annualrent at Baylis Road, London when the lease determined in May 2006. Gains fromthe sale of investment properties were £15,569 compared with £189,729 but gainsfrom trading property sales rose to £403,069 compared with £105,500. The incomeearned from our successful participation in the development of 39 houses atHerne Bay, Kent was £197,826. Other operating income of £130,615 included a£108,665 recovery of costs from Enterprise Oil PLC in relation to therefurbishment of St Magnus House, Aberdeen in 2000 together with miscellaneousincome from Ardpatrick Estate. Administration expenses of £1,148,378 were£155,386 higher than last year, principally due to increased professional fees. Net interest payable, £508,093, increased by £464,587 compared with last yeardue to significantly higher average bank borrowings and slightly higher interestrates. The weighted average base rate for the year was 4.90 %, 0.38% pointshigher than last year. Review of Activities The Group's property activities continue to give effect to our primary strategyof purchasing assets with medium-term development prospects and enhancing thoseassets, principally, by gaining more valuable planning consents. Investmentassets will probably be sold when they mature. The Group's Edinburgh New Town Investment portfolio is undergoing significantchange. In Young Street, adjacent to Charlotte Square, the lease on our twoproperties determined on 28 August 2006. The smaller of the two, 17 YoungStreet, together with two garages, has been let to the former sub-tenants forten years, with breaks, at a slightly enhanced rent. The larger property, 19Young Street, also with two garages, had been unoccupied for some years. Weagreed a satisfactory dilapidations settlement and then separated off thegarages which we let for £3,000pa each. The vacant office was sold at a priceequivalent to nearly £300/ft2. Residential values of New Town properties are generally higher than officevalues. 61 North Castle Street is a particularly elegant Georgian property andwe propose to reconvert the vacant ground and first floors to residential useand to incorporate the Edwardian extension at the rear of 61 North Castle Streetinto the contiguous office space in Hill Street for which planning and listedbuilding consents have been granted. In South Charlotte Street the first five-year rent review of the 4,500ft2restaurant let to La Tasca for 25 years was due in December 2006 and wasdetermined by arbitration at £94,800, a 46% increase. Our largest property in Edinburgh, St Margaret's House, was let to the ScottishMinisters until November 2002 and was the subject of a long dilapidationslitigation in the Commercial Court until an acceptable offer was made in January2005. Discussions with the City of Edinburgh Council planning officials haveindicated that any redevelopment proposals for St. Margaret's would require tobe considered in the context of a master plan for the island site which St.Margaret's shares with, inter alia, Meadowbank House, the 125,000ft2 1970soffice block owned and occupied by the Registers of Scotland, between the A1 andthe main east-coast railway line and "Smokey Brae". In consequence we have haddiscussions for several years with Registers to enhance our mutual interests.Unfortunately Registers, like many Scottish Government Agencies and Departments,are subject to a policy of dispersal away from Edinburgh and they have beenengaged in a relocation review process for five years. Stage 1 of the review wasdelivered to the Ministers in December 2004 and, in line with the review'srecommendations, Ministers ruled out the relocation of the whole Meadowbankoperation and requested the Registers to undertake a Stage 2 appraisal comparinga phased partial move from Edinburgh with the "status quo"- ie no move.Registers submitted their Appraisal to the Ministers on 8 July 2005 whosedecision was delayed several times until on 21 September 2006, in response to aquestion in the Chamber, the Minister, George Lyon, replied: "The Executive willannounce the outcome of the Stage 2 of the location review of the Registers ofScotland shortly". On 24 November 2006, bizarrely, the Executive "deferred" adecision. While the Group's preferred option was to undertake a development in conjunctionwith, or for the benefit of, Registers, we are now promoting a phaseddevelopment in which the St Margaret's site provides the first phase. In June2007 our architects produced an Urban Analysis report and in July 2007 theycompiled Development Proposals which have formed the basis of discussions withthe City of Edinburgh Council. We have agreed with the Council to produce anoverall Development Brief which is expected to be published in the spring and,if acceptable, approved this year. In our London property at Baylis Road in the Borough of Lambeth, the tenants,occupying the premises on short-term leases since the early 1990's, vacated themin May 2006. Colliers CRE's London office is advising us on several options forthe property. A moderate upgrade before re-letting is the least attractiveoption. A mixed redevelopment on our existing site of about 30,000ft2 is veryattractive. Residential values in Lambeth have risen by 18.9% in the year toOctober 2007 and are reported to be now nearly £700/ft2, but this rise is offsetby a fall in office values of about 10% and a rise of 0.5% point in yield. Asignificantly larger development, incorporating adjoining property for which wehave offered, is even more attractive. In Belford Road, Edinburgh, a quiet cul-de-sac, less than 500m from CharlotteSquare and the West End of Princes Street, we have a long-standing officeconsent for 22,500ft2 and 14 cars which has been implemented. We also have aseparate residential consent for 20,000ft2 and 20 cars. We are seeking toimprove the existing residential consent and to re-design the structure tosimplify construction and to increase the usable space. The prospectiveimprovement in the central Edinburgh office market is encouraging. East of Edinburgh, near Dunbar which has a station on the east coast mainline,we have two sites with planning permission, one for 45 large detached houses andone for a further 28 houses, including four "affordable". The dual carriagewayfrom Edinburgh has recently been extended and these sites are now only fourmiles further east, just off the A1. An ASDA superstore with a petrol stationrecently opened near the east end of the dual carriageway. At present we areredesigning the layouts to increase the number of houses and undertakingengineering works to drain a portion of our site that could accommodate up to 22additional houses. At Tradeston, Glasgow, on the south side of the Clyde opposite the Broomielaw wehold a planning consent for a development of 191 flats, predominantly two andthree bedroom, together with associated parking and open space and 10,000ft2 ofcommercial space. Tradeston was for a long time a considerably "run-down" area,but has recently benefited from some major redevelopments. The pace ofredevelopment has recently increased considerably as the proposed extension tothe M74, for which enabling works are being undertaken, will pass through thedistrict before joining the existing M8 at the Kingston Bridge. To facilitatethe construction of the motorway a swathe of primarily derelict andlong-blighted industrial buildings has been demolished. The rent review due inMay 2006, which is subject to a minimum RPI uplift, is still being negotiated. Planning consents have been obtained on two of our development sites in or nearEdinburgh, where construction should start next year. In August 2006, five yearsafter our original application, consent has been granted for eight detachedhouses at Wallyford which borders Musselburgh and is within 400 yards of theeast- coast mainline station and has easy access to the A1 near its junctionwith the City Bypass. On a contiguous site where two national house builders aredeveloping over 250 houses nearly all the houses are complete and sold. In EastEdinburgh at Brunstane Farm, adjacent to the rail station, planning and listedbuilding consents were granted on 13 December 2006 to convert the listedsteading to provide ten houses of varying sizes totalling 14,000ft2. Thenecessary demolition work has been carried out and specialist contractors arebeing appointed. Adjacent to the steading we own five stone-built, two-storeycottages suitable for refurbishment and possible extension, two ruined farmbuildings, one built of stone and likely to gain consent for residentialconversion and two-and-a-half acres of scrub land in the Green Belt fringeadjacent to established residential property. The inclusion of this isolateduncultivated area within the Green Belt seems anomalous and we have entered anobjection in the current local plan review. The Group now owns fifteen separate rural development opportunities, nine inPerthshire, three in Fife, two in Argyll and Bute and one in East Dunbartonshireof which a very varied six have been acquired since 30 June 2006. In Fife nearAnstruther, eight miles from St Andrews, we acquired an extensive steading withstone buildings set in about four acres with a southern aspect to the sea.Redevelopment of the stone buildings should provide at least fifteen houses withmore possible within the "footprint". On the Isle of Mull, near the village ofLochdon, we bought a two-acre greenfield site with long-term prospects behindsome existing cottages overlooking the sea. In Strathtay, Perthshire, we bought a 4.6 acre site in March 2006 partly withinthe settlement boundary of the village with the balance adjoining the village.In May 2007 an elegant house with a very large garden marching with our site wasoffered for sale which we purchased and immediately sold on the house, retaining1.7 acres of its garden within the settlement boundary and adjacent to ourexisting 4.6 acre site. Two large properties were acquired during the year. Near Kinross, adjacent tothe M90, we bought Chance Inn Farm, a 257 arable acre farm with a very extensivesteading of c27,500ft(2) standing in three acres and a modern farmhouse. NearKirkintilloch, only eight miles from the Kingston Bridge in central Glasgow, wehave bought the remnants of the Gartshore Estate, extending to over 203 acres,including about 77 acres of formally-designed woodland garden with an unusuallylarge walled garden near the former mansionhouse site. There are several ruinedproperties previously forming part of the walled garden, two occupied cottagesand a handsome Victorian stable block of about 15,000ft2 already partiallyconverted to residential use. After the year end we bought a farmhouse atCarnbo, four miles east of the M90 at Kinross with an one-acre garden within thesettlement and a three-acre field just outside it. Many new houses are currentlybeing built in Carnbo. In 2005 there was a slight relaxation in central planning policy for developmentin rural areas which was outlined in Scottish Planning Policy 15: Planning forRural Development. In particular the first sentence of paragraph 23 states:"opportunities to replace rundown housing and steadings with designs using newmaterials should also be embraced". The majority of our rural developmentopportunities are steadings for conversion in accessible locations set inattractive countryside. Most of these steading developments lie within Perth andKinross where the Council has issued "planning guidance" taking into accountSPP15 to supplement the local plan. Three of the steading developments are inFife where no specific acknowledgement of SPP15 has yet taken place and thepreparation of Local Plans is delayed. Consequently detailed developmentproposals for such steadings have not yet been prepared. In Perth and Kinross plans are far advanced for four of the five steadingdevelopments there. The fifth one, West Camghouran by Loch Rannoch, couldaccommodate only up to three or four units, and detailed plans will be preparedshortly. At Ardonachie steading, Bankfoot, near Perth, after extensive anddetailed discussions with the planning authority, we have submitted anapplication for twelve houses over about 20,000ft2. At Tomperran, asmallholding near Comrie, Perthshire, we have just applied for planningpermission to develop the steading and an adjoining area within the settlementto provide twelve houses on 19,047ft(2). The smallholding includes two acreszoned for industrial land and about 34 acres adjacent to the settlement whichwill be promoted for a housing allocation in the now overdue Strathearn LocalPlan. At Chance Inn an application has been made for 23 houses including fouraffordable units in replacement of the extensive buildings previously used forpig fattening: a considerable possible improvement to the amenity of the area!The farm lies within the Loch Leven catchment area and consent will beconditional on meeting the strict control of phosphate emissions. At Myresidefarm in the Carse of Gowrie between Perth and Dundee we have applied forplanning consent for eight houses of 12,410ft2 on the site of the existingsteading adjacent to the existing attractive listed farmhouse. In addition tothe steading developments plans are far advanced for our development site atBalnaguard, near Strathtay, where a planning application has been submitted fornine houses. This application was modified from an original detailed proposalfor ten houses whose layout breached the recently established 1:200 year floodrule for the Balnaguard burn running along one side of the site. Furthermodifications to the layout will almost certainly be required. The development of our estates at Ardpatrick and Gartshore presents both mediumand short-term opportunities. The Ardpatrick estate occupies a peninsula in WestLoch Tarbert and comprised a mansionhouse, based on a Georgian house built in1769, ten estate houses or former houses, a farmhouse and a farm steading andother buildings for potential residential development, and a number of possiblenew housing sites in locations considered suitable in the Finalised Draft LocalPlan. The property extends over 1,000 acres, has over 10km of coastline,commands striking views and includes a grassland farm, an oak forest, a privatebeach, a named island and coastal salmon fishing and other sporting rights. Three of the outlying cottages have been repaired, redecorated and brought to asaleable standard. The smallest one was sold in February 2007, the largest onein June 2007 and the remaining cottage, set back from the others, has just beensold. A fourth property in this group, Keeper's Cottage, at presentuninhabitable, has gained planning approval for conversion and for a largeextension, subject to the provision of an additional and separate access. Afifth cottage, at the northern extremity of the Estate, the former Ardpatrickpost office, has been undergoing extensive repairs but should be marketable inthe late spring. The South Lodge cottage on the shore drive gained planningconsent in June 2007 for an equal-sized extension and a large detached garage. Ardpatrick House enjoys a beautiful setting looking SE over West Loch Tarbert tothe Kintyre peninsula and is built to a splendid classic Georgian design,originally comprising a central three-storey building with two flankingpavilions. The walled garden to the north west and the multi-faceted stoneelevations to the NW provide an excellent setting for the stone-built estatehouses around the walls of the garden. Fortunately, because of itsconstruction in three separate portions and the existence of three staircases, anatural division is possible without disrupting the principal rooms. A furtherpartition can be easily achieved by introducing another staircase in theVictorian servants' quarters towards the rear of the house, currently a maze ofstorage and preparation rooms. Ardpatrick will then become four separatehouses ranging from 1760ft(2) to 3478ft(2), each with its own front door, one ofwhich will be a reinstated 1769 entrance. Planning and listed buildingconsents for the conversion have been granted and the necessary remedial workshave started. Around Ardpatrick House we have obtained consents that enhance the existingproperty and mirror existing buildings, creating a coherent whole. Permissionhas been obtained to convert and extend the gardener's building into a threebedroom house, to extend the existing coach house into two 3/4 bedroom flats andto create two large new detached houses. The creation of this "garden village"is subject to the provision of appropriate roads, water and services, all ofwhich are well below standard. Considerable design work has been done butfurther work remains. Needless to say progress is hindered by distance andremoteness. Gartshore Estate presents an unusual opportunity. The estate lies within adesigned landscape, containing a very large walled garden, a magnificentstone-built Georgian pigeonnier and the site of the huge former Victorianmansionhouse in a country setting, but with a mainline station nearby and onlyseven miles from the centre of Glasgow. Detailed planning work has beencommissioned to reconcile restoration and maintenance of the landscape with anappropriate use including possibly a "care village". Separately, designs forthe conversion of the 15,000 ft(2) stable block and restoration of the stonebuildings together with appropriate conversions are being undertaken. In quite a different setting and in a very different part of Britain, Herne Bay,Kent, our joint venture development of 39 modern 2/4 bedroom houses concludedvery successfully. Economic Prospects A large star burns, explodes into a supernova and collapses into a dense mass ofincreasing gravitational attraction which becomes so great that not even lighttravelling at 186,000 miles per second can escape: a black hole. The financialmarket presently resembles a black hole into which increasing quantities andcategories of credit are disappearing. The stellar phase, preceding the credit black hole, has been fuelled by severalsources and has burned for a long time. Paradoxically, a major fuel source hasbeen the success of the central banks in achieving their primary objective oflower inflation and stable growth. However this new stability created a strongincentive to seek higher returns, higher returns whose higher risk was not fullyassessed or was judged to be sterilised by the central banks' control of theinflationary risk A second potent fuel of the stellar growth of credit has been its artificiallylow cost. The 1998 credit crisis, caused primarily by the collapse of Long-TermCapital Management, created a precedent for future monetary policy. Although theextent of that crisis turned out to be insignificant by the present standards,some $3bn, mostly borne by the hedge fund investors, the monetary authoritiesreacted strongly. The Fed, under Alan Greenspan, cut interest rates by 0.25%points in three consecutive months, and the Bank of England cut base rates seventimes in the ten subsequent months by a total of 2.5%. Cheap money was alsoused, and to great effect, in combating the US recession caused by the collapseof the dot-com bubble in 2001 and reinforced by the terrorist attacks of 11September 2001. Interest rates, which were 6.5% at the beginning of 2001, fellto 1.75% by the year end and fell further to 1% in January 2003, this low ratepersisting until June 2004. Negative real interest rates from 2002 to 2005assisted the US economy to recover to 2.5% growth in 2003. Even after therecovery from the dot-com bubble cheap money continued to be made available. Theeconomies of Japan, China and the Middle East oil producers produced largesavings - in the case of oil, surplus "petro-dollars" sucked by high prices outof US consumers' hands. The fear that the resulting lower domestic demand mightin extreme circumstances lead to deflation caused the monetary authorities tocontinue a policy of cheap money. The then fear of deflation and the investmentpreferences of the foreign savers for long bonds over equities gave rise to whatAlan Greenspan termed a "conundrum", the exceptional low returns on conventionalinvestments. In the UK this conundrum was manifested by nominal long term Giltreturns falling below 4% per annum. Another change in investment thinking causedby the Fed's supportive policy was the emergence of the markets' belief in the "Greenspan put", the notion that the central bank would rescue tumbling markets:the penalty for being wrong was reduced thus making higher risk returns moreattractive. Lower returns, coupled with a perception of lower risk, increasedthe demand for higher risk assets. Thus spreads of emerging country bonds overUS Treasury Bonds fell, UK spreads for variable mortgages fell and the qualityof the covenants acceptable to lenders for any given margin deterioratedsignificantly. Increased credit reduced the premium for risk. Credit availability was also increased by the financial innovation undertaken bycommercial banks and finance houses. Traditionally banks "intermediate" betweenshort-term deposits and longer-term lending. Using "securitisation" banksoriginate the loans and then distribute them, usually retaining fees but notobligations or only residual obligations, allowing banks' capital to be recycledand their balance sheets unencumbered or conditionally so. The assets"securitised" include residential mortgages, credit cards, trade and loanreceivables, car loans and other financial bonds. The key to securitisation wasto provide "structures" whose assets were securitised loans paying a significantmargin above LIBOR but financed by LIBOR-based bond funds at close to LIBOR.Such structures can be further refined by stratifying the borrowing intoseparate layers of senior debt, junior debt, mezzanine and equity or creatingSpecialised Investment Vehicles "SIVs". Thus a package of low-covenant,high-risk loans, such as personal credit can be converted into several slices ofwhich the senior slice is of the highest investment grade: effectively afinancial philosopher's stone that transmutes low grade credit into investmentgrade loans. Between 1997 and 2004 the value of asset based US commercial paperin these structures rose from $270bn to $650bn, or from 28% of all commercialpaper to 51%. Over the same period the Euro commercial paper market rose from$10bn to $100bn, from 7 1/2% of the market to 20%. Clever and elaborate financial systems allowed for a burgeoning increase incredit. However, the resulting debt was not primarily in the hands of theoriginating banks but sold down by them into a myriad of conduits, SIVs andother such "structures" sliced and packaged into different degrees of risk,mostly as commercial paper or Collateralised Loan Obligations, "CLOs",refinanced on the inter bank markets. In consequence, as risk became attenuatedand dispersed away from the original lender, the standard of borrowers'covenants could be relaxed with impunity and higher returns for the originatingbanks could be obtained by increasing turnover, even at the expense of increasedrisk. Such financial engineering has further fuelled the credit boom. A principal source of fuel for the new exploding credit supernova was the USmortgage market, particularly the sub-prime market. US house prices were alreadyrising at 10%, when the Fed started cutting rates in the dot-com crisis of 2001,before rising to 15% in 2005/6. Rising house prices encouraged speculation thatprices would keep rising and recently it was reported that 31.5% of housepurchases were for "investment", including "flipping", buying ex-plan andselling before completion, which had become common often using wholly borrowedfunds. Housing starts jumped from 1.5m/pa in August 2001 to a peak of 2.3m p.a.in January 2006. Subsequently the Case-Schiller House Price Index has fallen byover 10% and housing starts by 47%. This rapid reverse exposed short-terminvestors many of whom had, at best, poor credit ratings and who formed anincreasing proportion of the market. The deterioration of the quality of creditis simply illustrated: in 2003 only 38% of loans were for 90% or more of value,but by 2006 56% were; in 2003 full documentation was provided by 63% ofborrowers but by 2006 only by 53%. Unsurprisingly, recent loans have had thehighest delinquency rates caused, according to an analysis presented to the IMF,by "excessive and inappropriate lending". The Federal Division of Supervisionand Consumer Protection estimates that 14% of the $1.2tr sub-prime mortgages arealready in default and a million sub-prime borrowers this year and a further0.8m next year face higher interest rates, following low "starter" rates.Patently the default rate is set to rise further, especially if economicconditions, particularly interest rates or employment levels, deteriorate. Thus the credit market has enjoyed a stellar expansion which culminated in anexploding supernova before collapsing into the current "black hole". Theinfluence of the "black hole" is pervasive, operating directly by reducing thesupply of credit and by increasing its price: the US asset backed commercialpaper market, worth $1,173bn in July 2007, dropped to $850bn in the three monthsto November 2007; and the three month sterling LIBOR rate, which is normallynearly equivalent to MLR, has been at a premium of about one percentage pointsince September 2007. The indirect effects of the black hole on the multiple products of financialinnovation, the "structures, SIVs and conduits" are even more serious. They areprimarily designed to profit arbitrage between the normally low short-term LIBORrates and the higher margin long-term loans. Now, when credit is available, itis at rates that reduce or reverse the expected arbitrage and the credit ratingsof some of these structures and of their components are being downgraded, andasset realisations, usually at a loss, are being undertaken to meet liquidityrequirements, a vicious cycle with each downgrade potentially undermining otherpositions. Many fund managers do not expect the fundamentally flawed SIV modelor that of other similar structures to survive. Total loss estimates vary greatly, as in any one credit sector there are layersof interdependent variables. In the US "sub-prime" sector, where foreclosures on2m or more homes are expected, estimates of mortgage losses vary from $100bn toseveral hundred billion. The destination and the full effect of such mortgagedefaults is unclear as most of these loans have been sold by the originators,usually packaged as Asset Backed Securities (ABS) to investors. The Bankestimates there are $1,300bn of bonds worldwide backed by poorer qualitymortgage credit. However, some of these mortgage bonds have been included indiversified packages of loans, CLOs and other structures tainting, them all. Asthe FT puts it "the multi-layered nature of these complex financial flows meansit is hard to assess how defaults by homeowners will affect the value of relatedsecurities": surely a Delphic understatement! The CLOs affected by thiscontagion are having their credit rating downgraded and, as there is nowvirtually no market in CLOs, there is no external market value. Values based on"models" are unreliable, as tiny changes have been shown by the Bank of Englandto reduce the price of mortgage-linked debt by as much as 35%. Valuations can bederived from traded derivative indices such as ABX. US mortgage backedsecurities of mid-quality debt traded on the index in September at 40% of facevalue, and BBB debt at 20%. Notwithstanding these external indicators certain USbanks are still valuing mid quality debt at 63% to 90% of face value. Good news spreads quickly; bad news leaks out slowly: thus it is now. Thecurrent crisis manifested itself on 9 August 2007 with a "credit shock" in theworld banking system, in particular, a withdrawal of funding for collateralisedmortgage securities. Early estimates of $20- $30bn losses in September 2007increased to $60 - $70bn by October, to at least $100bn by early November, andby mid-November the Royal Bank of Scotland predicted losses rising to $250-$500bn. The Hudson Institute now estimates write-offs in America will be $600bn- $800bn. It seems incredible that in 1998 it was considered a crisis when LTCMcollapsed leaving total debts of ... just $3bn! The present crisis is unprecedented both in scale and in type as credit riskresults in progressive economic paralysis. The American credit "hit", say$700bn, is patently a very large sum which, due to the securitisation, is spreadover many banks and institutions, some of which are under-capitalised. Someinstitutions seem to be unaware of their financial exposure, as one afteranother they make announcements of larger and larger "write-offs". Clearly, iftheir knowledge of their own exposure is conjectural, their understanding oftheir exposure to many of their trading partners is, at best, peripheral. Therisk of lending to or having counter parties to trade has suddenly becomedramatically higher - so great, that risk exceeds return and transactions seizeup. The credit crisis was transmuted into a liquidity crisis, which in turnincreased the risks of further defaults, as classically exemplified by NorthernRock which, although possessing a large surplus of assets over liabilities, wasunable to refinance these liabilities. Thus credit risk and liquidity risk havebecome mutually reinforcing. Financial turmoil permeates the whole western economy. The investment banks atthe centre of the storm have been caught holding deals completed but not solddown, including lower grade loans and assets awaiting repackaging intoasset-backed securities, which will have to remain on their books. Additionally,they will be required to take back on to their own balance sheets at least someof the "conduits" set up to structure the SIVs. The Bank estimates that thesetwo requirements total over $1,000bn for which the UK banks would require newfunding of about £170bn. Securitisation has allowed the banks' lending toballoon, or, as the FT puts it, "real-world lending has been artificiallyinflated for years". The securitised vehicles were outside regulatory controland any risk assessment was done by the ratings agencies, but then only inrespect of credit risk, not liquidity, a very real separate risk as NorthernRock demonstrates. The Bank says "financial markets and institutions appear tobe in transition" meaning, more bluntly, as one strategist says, "what's atstake is the future of securitisation" and the current unregulated practices. The credit shortage has already increased its price. For example the cost of"AA" corporate bonds is 1.58% points higher than US Treasuries, the highestmargin ever, compared with a "normal" 0.83% spread and the previous 1.45% peakfollowing the dot-com bubble. In October 2007 25% of banks tightened theirstandards on consumer loans, and 40% on prime mortgages, a more rapid adjustmentthan occurred early in the dot-com bust: as the Economist says "consumer painwill be intensified by a sharp credit crunch, the scale of which is justbecoming clear". US credit and house prices have an incestuous relationship:credit facilitated price rises, price rises facilitated credit, doubling it inreal terms since 1997 to a record 130% of disposable income, 50% higher than in1997. However, housing starts have been falling and are now 47% off the peak,and house prices have fallen about 10% this year and further large falls areexpected. Goldman Sachs report that, if the US avoids a recession, prices willfall by 7% in both 2008 and 2009 but by up to 30% in a recession. The effects onthe economy will be deleterious as the house construction sector accounts for 6%GNP and US consumption varies with house prices at a rate of between 4% and 9%of the change, a far closer relationship than in the UK. A quite separate andadditional threat to the economy is posed by the recent further increase in oilprices to over $90 which alone is likely to reduce consumption by 1.5% points. The Fed has reacted to the credit crisis and the threat to economic growth bycutting interest rates three times, or by 1% point to 4.25%. Previously, in thedot-com crash, nominal rates were as low as 1% but at present inflation isrising, primarily due to the increased oil price and to the 6% increase in foodprices. Oil and food price increases reflect external markets rather thaninternal US inflationary forces and they could be considered as "one-off" or,for food, partly seasonal, and thus not inhibit further monetary relaxation.Indeed, as domestic conditions are likely to be deflationary due to the higherprice and the lower availability of credit, falling house prices and lowereconomic activity, monetary policy could be eased further. Lower interest rates would reduce the $ exchange rate which since its peak in2002 has declined by 24% on a trade weighted basis, by 41% against the Euro andby 33% against Sterling: and, since the start of the sub-prime crisis, by 9%against the Euro. Devaluation has increased US net exports and a further modestfall will assist in "rebalancing" the US economy. A major fall in rates risks awholesale rapid diversification out of US dollars, a remote possibility, broughtnearer by the sudden collapse of the most sophisticated credit market in theworld, the expensive emergency funding for some of its largest banks and themanifest inability of some household banking names to determine the location andextent of their liabilities. The FT puts it succinctly "the current accountdeficit complicates the Fed's efforts to deal aggressively with risks to growthbecause a deficit economy is always potentially vulnerable to a loss of globalinvestor confidence". At present US employment continues to increase and tradeand growth are little affected. However credit is a "lag" influence and LehmanBrothers estimate that a US recession in 2008 is 30% likely, but, ominously,Alan Greenspan's estimate is nearer 50%. Predictions should be viewed in ahistorical content. Of the sixty world wide recessions in the 1990's only twowere predicted, according to the IMF, but, disturbingly, the Economist notes theHarvard Economic Club's 1929 assertion: "there will be no recession". The UK's economic prospects are currently aligned more closely with the US thannormal. The US produces 25% of world output and it has close tradingrelationships with the UK which shares the credit default and consequentliquidity problems with the US which are predominantly "Anglo-sphere" phenomena,spilling into Euroland but with lesser effects elsewhere. UK economic growth in2007 is likely to be around 3.0%, above the UK's recent long-term average as theeconomy expands for a record sixty-one consecutive quarters. The credit crisishas downgraded estimates for UK growth in 2008 and made them subject to muchgreater variation. The Bank of England's August central forecast, based onunchanged interest rates, was for growth to slow gradually to a low of 2.5% intwo years, but in November the Bank expected growth to be below 2.0% by 2008,almost 1% point lower, as a result of a drop from 1% in the third quarter of2007 to about 0.3% in the first two quarters of 2008. Fortunately, the Bank'scentral expectation, based on nominal interest rates of 5.75%, is for inflationto be well below 2% in 2009, so facilitating interest rate cuts withoutendangering the inflation target. The UK has faced two similar sub-prime crises, the May 1972 - November 1974secondary banking crisis and the August 1997 - August 1999 LTCM crisis. On bothoccasions then, as now, base rates peaked as the crisis broke. In 1972 rateswere cut three times, but only by 1%, and only from 13% to 12% after a sharpearlier rise from 8%, and GDP fell in both 1974 and 1975. In contrast fromAugust 1997 rates were cut seven times by a total of 2.5% points, more thanreversing previous rises and economic growth remained strong, before collapsingshortly afterwards when the dot-com bubble burst. It is arguable that too littleintervention was undertaken in the banking crisis, although conditions wereovershadowed by the inflationary impact of the 1973 oil shock and by the "threeday week", and that too much intervention was undertaken in the LTCM crisisgiven the then expanding bubble of the dot-com boom. The optimal interventionlies between two differing positions. It could be construed that assistinginstitutions in difficulty by providing finance, by injecting money intoilliquid markets and by reducing rates creates "moral hazard", as this actionrescues those who took high risk positions based on the premise that in extremisthe downside risk would be mitigated by policies for the general good. Such anasymmetric risk pattern is comfortably shared by some traders, fund managers andhedge fund dealers: higher risk can bring higher personal rewards but thepossible higher losses lie mostly with their institutions' investors. TheGovernor, confronted with the collapse of Northern Rock PLC, wrote an elegantessay on the evils of moral hazard and fortunately, but not until valuable timehad been lost, caved in and pumped money into the market for the general good,albeit too late to repair all the damage his delay occasioned. The MPC isconstrained by its remit to target inflation at a low level on a specific narrowdefinition. Wider, broader objectives favoured by some commentators andconsidered more likely by them to provide enhanced economic stability and growthare normally excluded from consideration. CPI inflation, like all "single"targets - money supply, the gold standard, the balance of payments, the £/$ rateand the shadowing of the D-Mark - is proving necessary but not sufficient.Perhaps the Bank will surprise us all with a "Nelsonian" turn: "You know,Foley, I have only one eye - and I have a right to be blind sometimes....... Ireally do not see the signal". The Fed's role is not similarly prescribed as it has no fixed inflation target.There influential opinions, including Professor Summers of Harvard University,are advocating strong and direct intervention on policy and at a direct level.On policy he says "maintaining economic demand must be the over-archingmacro-economic priority .... the Fed must recognise that levels of the Fed Fundsrate that were neutral when the financial system was working normally are quitecontradictory today .... the fiscal system needs to be on stand-by to provideimmediate ...........stimulus through spending or tax benefits ..........if thesituation worsens". In the US there is a strongly based lobby forintervention, a view which circumstances may impose on the UK. Capital Economics analyse the six components of the sub-prime crisis affectingthe UK of which the most important one is the extent of any US economicslowdown. However, given the present performance of the US economy and itsresilience and flexibility and the likely fiscal and monetary policy, I expectgrowth to be curtailed but a recession narrowly avoided and damage to the UKeconomy to be limited. The credit crisis will inhibit growth in the financialsector, accounting for 9% of the UK's GDP, which will slow down due to areduction in M&A, leveraged buyouts and financial "engineering" but there willbe partial offsets elsewhere. Many bonuses may be finessed but fewer jobs seemlikely to be lost permanently and in aggregate these should have little impacton consumer spending. Consumer spending is likely to be curtailed by a fall inconfidence and by lower asset prices. The image of depositors queuing round theblock at Northern Rock, the first run on any UK bank since the Bank of Glasgowcollapsed in 1878, could be severe notwithstanding the Bank's subsequent 100%guarantee, but a guarantee insufficient to stop depositors from continuing touplift their deposits. Equity wealth has fallen as the crisis unfolded but untilnow has been partially compensated by rises in housing wealth, to which consumerexpenditure is more sensitive. However, as further falls in house prices arelikely and as consumption varies by about 3% of any house price change,interestingly half that obtaining in the US, consumption will fall, by say 0.3%point for every 10% fall in house prices. Higher inter-bank rates and tightercredit conditions are the most immediate effects of the crisis. The three monthinter-bank rate is currently trading at about 1% above the repo rate, sufficientif sustained to reduce growth in GDP by about 0.35% per year. Tighter creditconditions will further increase the cost of credit and its availability, as isalready evident in the housing market, leading to a further fall in house pricesand the consequent effects on consumption. UK economic growth in 2008 is forecast to be below average but with the declinelimited to about to about 1% below historic trends, provided that the US economydoes not slip into recession and that an inflationary straightjacket does notinhibit cuts in the repo rate. Property Prospects The CBRE All Property Yield Index has continued to fall from 7.1% in late 2003to 4.8% earlier this year before rising to 5.2% in the autumn. If there had beenno other changes in four years, then the underlying property values would haveincreased by 36.5%. Over those years shops and retail warehouses rose byapproximately the average but industrials were below average at 32.2% andoffices above average at 46.1%. Earlier this year Gilts yielded 4.9% comparedwith 4.5% in late 2003 but over the same period the All Property yield hadfallen to 4.8% from 7.1%, resulting in the All Property Index yielding 0.1%points lower than Gilts this spring, compared to being 2.6% points higher thanGilts in 2003. Such low property yields are often associated with high rentalgrowth, the increase in rent compensating for the relatively low yield. The AllProperty Rent Index rose only 1.1% in the latest quarter, just above the 0.9%rise in the Retail Price Index. Over the past five years the All Property RentIndex has grown by 15.9%, but, as the Retail Price Index has increased by 17.1%,it has fallen in real terms. Since the market peak in 1990 the All Property Rent Index has grown 45% but hasfallen 11.7% in real terms. In real terms both offices and industrials havefallen about 12% although Docklands' offices, by far the best performing officesector, have risen by 19%, shops have fallen a mere 1%, but, in strong contrast,retail warehouses have risen a handsome 68.5%. Interestingly, several peripheraloffice locations including Yorkshire and Humberside, North East, Wales andScotland have almost maintained or increased real rents. Based on both historicand recent rental evidence past rental rises have mostly been below inflationand, unless an important change is imminent, of which there is no sign, therecently recorded low in investment yields is unlikely to have been due toprospective rental increases. Last year I quoted an interesting historical analysis by Capital Economics ofproperty yields compared with other asset classes. Since the 1920s there hasbeen an average 0.31% points reverse yield gap - i.e. property yielded less thangilts. Property is an inherently riskier asset than gilts suggesting thatproperty investors should require a premium return over gilts. A premium overgilts existed from the 1920s until the early 1970s and has again been presentsince the mid 1990s until a very short period earlier this year. The 1970s and1980s were characterised by high inflation - the RPI was 25 in 1974, 50 in mid1978 and 100 on 1 January 1987, a fourfold increase or a reduction in value of75%! If this period of exceptional inflation is set aside, on the basis that theexistence of a negative, or reverse yield gap, is anomalous, property yieldshave historically been 1.5 percentage points higher than gilts, a much higherpremium than is currently obtained and recent property yields have beenunusually low. I reported last year that the fall in yields plus a rental income of about 5.0%together with an inflationary rise in rents had produced total returns toSeptember 2006 of 20.7%, up from 17.5% the previous year, and that over theprevious three, five and ten years total returns from property had exceededthose of all other asset classes. These excellent returns have led toconsiderable additional investment, notably from overseas investors, while UKproperty funds have tripled in size over the last two years as "money has pouredin from both retail and institutional investors". In 2006 Bank lending tocommercial property rose by 17.0% to £169.9bn, a large progressive increase from£70.0bn in 2001. Institutional net investment was £4.6bn in 2006 and theincreased overseas investment, was an "impressive" £2.1bn in the first quarterof 2007. Patently there has been an increased demand for investment propertybut, as its supply is relatively inelastic, increases in demand have resulted inlarge price increases. Prices are positively serially correlated in theshort-term - i.e. if prices rose in last period they will probably rise in thenext period: good performance attracts further demand that produces further goodperformance - but, in the long-term, prices are negatively serially correlated. Last year I asked: " the question for property is: is it still the short-term?"The change from short-term positive correlation to long-term negativecorrelation is patently large and insight into its timing would be invaluable.That the switch will happen is probably known, at least subliminally, to manyplayers in the market place. One such player, Chuck Prince, the former chairmanand chief executive of Citibank, famously said "When the music stops, in termsof liquidity, things will be complicated. But as long as the music is playing,you've got to get up and dance. We're still dancing". The FT commented "hecalled the top of the market"....... before he waltzed out! The study of structural system changes is part of physics. Professor Sornette,author of "Why Stock Markets Crash", has drawn attention to some interestinganalogies between physical and financial structures. When force is applied to apure homogeneous quartz crystal, it, unlike an impure crystal, does not exhibitany change or "foreshock" as the force is increased until, without warning, itshatters. Similar homogeneity is evident in the structure of molecules inphysical systems about to make the phase change from, say, liquid to gas or theswitch from magnetism to non-magnetism, and it is such homogeneity that isconsistent with instability. Normally markets are endemically heterogeneous,often appearing chaotic, and respond to "force" by movement in one direction oranother: they do not effect sudden changes, but adjust up and down. The doctrineof singularity posits that the less homogeneous systems are the more stable theyare, but when they narrow to a consensus, or singularity, instability threatens. The behaviour of the commercial property market is consistent with thehypothesis that homogeneity is a prelude to fracture. Returns have been veryhigh; a relatively specialised asset class has been opened up to retailinvestors who have invested heavily; funds have promoted commercial propertyinvestment aggressively ; bank investment has increased; more and more complexand more geared investment vehicles have been created; reasonable expectation ofreturns has diminished progressively and depended more and more on increasingcapital values rather than rental growth, while financing costs rise; and, toresort to a parochial genre, latterly taxi-drivers and student bar staff firstasked advice on and then gave advice on such investments! Such behaviour appearsto be a classic example of the "principle of singularity". The market has now fractured. In August 2007 the IPD All Property return wasnil, comprising +0.4%. Income return and - 0.4% Capital return, in September theAll Property return was -1.2%, a capital return of -1.6%, in October the returnwas -1.5%, a capital return of -1.9%, and in November the capital return was-3.5% giving a cumulative four month capital fall of 7.3%. In 2005 I reportedthat commentators including Cluttons, Colliers and the Estates Gazette IPFpredicted 2006 All Property returns of 7% to 9%, based on moderate rental growthbut no further fall in yields. By December 2006 the total return was 18.1%,marginally below the near record 18.8% in 2005. Last year the same commentatorspredicted returns of 7% - 10% in 2007 based on moderate rental growth and evenlower yields. To end October 2007 IPD reported a return of 1.8% comprising 4.1%income return but a negative capital return. The year out-turn to end December2007 is at best likely to be nil as indeed these three commentators nowforecast. They were 10% points too low for 2006 and 10% points too high for2007, as returns rose sharply to the peak from which they are now rapidlyretreating. More investment, a widening of the class of investors, a marketarguably based on "momentum", values significantly higher than traditionalanalysis - i.e. yields below short-term money rates with no prospective rentalgrowth - and a peak in value are strong characteristics of a "bubble". Like thequartz crystal in Professor Sornette's analogy, the structure became lesscomplex, or more singular with no longer a balance between buyers and sellers.Singular systems do not adjust, as normal markets do, they fracture. Property "crashes" occurred between 1972 and 1974 and between 1988 and 1991.Yields peaked at 8.7% and 8.6% respectively, 2.7% points and 1.8% points higherthan the low yields immediately preceding them, giving a fall in capital valuesof 31.0% and 25.6%. The CBRE All Property Yield Index recorded a low of 4.8% inJuly 2007 and if drops in value of 31.0% or 25.6% occur, the correspondingyields would be 6.9% and 6.5% respectively. During both these previous "crashes"interest rates were very high, RPI inflation averaged 121/2% and 61/2%respectively, and there were severe recessions. Although prospective economicconditions are likely to be less favourable than recently, the extremeconditions obtaining in both the previous crashes are most unlikely and, giventhe market propensity to exaggerate trends, I expect yields to rise to 6.5% +/-0.5%. The Governor of the Bank of England has recently said that the potential for afall in commercial property and housing markets posed the greatest threat to theeconomy. The property crashes of early 1970s and the late 1980s were primarilythe result of, but not the cause of, the severe economic dislocations at thetime. The present position represents the antithesis, property posing the threatto the economy. A fall in investment property values, even the predicted severefall, seems unlikely to have far-reaching economic effects. Bank losses would betiny in relation to the sub-prime fallout and the equity losses, extreme in someinstances, would directly affect relatively few private investors as most losseswould fall on institutional funds where specific effects would be greatlydiluted. The effect of a fall in house values is very different. House pricesin England and Wales have risen by 112% since 2000, including a rise of 9.1% inthe year to November 2007. There have been many incorrect predictions of animminent rapid fall in prices, but while these cries of "Wolf" have provedunfounded, there are signs of a distinctly "unlamblike" creature in the fanknow. For November 2007 the Halifax showed a 1.1% fall, Nationwide a 0.8% falland the RICS survey a net balance of 22% report falling prices over the lastthree months. The background to this fall is succinctly put by Acadametrics, thecompiler of the FT House Price Index: "the expectation for a slowing market ......remains regardless of any decisions by the Bank of England. Indeed, theBank's previous increases have now collided with the tightening in mortgagecredit resulting from the sharp increase in mortgage arrears and repossessionsand loss of confidence in mortgage backed securities in the US market and, to alesser extent, in the UK". Futures house prices have also fallen and theNovember expectation of house price "growth" over the next twelve months fellfrom -2% to -7%. This time the wolf is in the fank and price falls, oftenpreviously predicted, of up to or over 10% seem likely. The extent of any price falls will vary among house types and among regions. Newproperties seem to be at greater risk. House building is a quasi-production linejob with high operational and financial gearing. Thus there is a considerableimperative, in the short-run at least, to keep selling even at lower prices. Incontrast for many house owners buying another house is discretionary. Largefalls are likely among the cities' new-build flats. Historically many new-buildflats were sold as buy-to-let. However rising interest rates have reduced theequity return on many mortgaged properties to low positive or negative levelsand, as capital values have been falling, prospective returns are at best verypoor. Even where returns appear more attractive finance is often not availableor, if so, only at a low Loan to Value and or at a higher price. Thus asbuy-to-let markets have collapsed and prices have fallen with some developersoffering discounts of up to 25%, while recently newly built flats in somelocations are selling for up to 35% off the "new" price. The analysis of possible changes among the regions is more complex anddifferent. The flat market is an investment market similar to commercialproperty, but, as the main housing market is not an asset class to be exchangedfor another on performance criteria, this feature dampens house pricevolatility. The downturn in the "commodity" flats market is presently mostmarked in English provincial cities, but it seems likely to spread to all areaswhere house building has included a very high percentage of flatteddevelopments, a widespread situation, as for the first time, due to Governmentplanning policy, more flats than houses have been built. An important key to the prospective relative performance of house prices indifferent regions can be ascertained from consideration of the early 1990scrash. The late 1980s inflationary boom had a disproportionately high impact onLondon and the South East where business, jobs and house prices boomed beforethe subsequent recession. The effect on house prices in the South East wasamplified: they went up more and came down more with both effects "ripplingout", as it was described. On this occasion any prospective reduction in houseprices will be due to the credit and liquidity constraints that will apply moreevenly throughout the UK, although areas with the most rapid rises will probablyhave the largest falls, including the South East. In Scotland, historically, house prices have been less volatile than in mostother UK regions. Local prejudice is that "house prices have never dropped inEdinburgh" but this does not bear examination. Certainly, in the 1990srecession, some areas in the City very nearly maintained nominal values but theyall suffered real price falls. The Scottish house price-to-earnings ratio is thelowest in the UK giving some inherent stability. The most recent HBOS reportstates that prices are still rising in Scotland and predicts that prices in 2008will rise in Scotland but not in the UK as a whole. Future Progress The slowdown in the investment property market and the current uncertainty inthe housing market will affect the Group to differing degrees. A possible fallin investment values would have a significantly lower impact on the Group thanpreviously. Investment value changes, by definition, do not apply to ourdevelopment properties or to our trading stock. Most of our long-standinginvestment properties currently have a development prospect or a development"angle" and this insulates them from the full effects of any investmentdowngrade. Recently acquired investment properties have been purchasedspecifically to establish a development option except where they havereversionary potential. In addition to its investment portfolio the Group now owns fifteen ruraldevelopment sites, four significant city centre sites, two small sites in theEdinburgh area and seventy-three plots near Dunbar. Most of these sites can bedeveloped over the next few years but some will be promoted through thefive-year local plan process. Development of the two Edinburgh sites shouldstart next year, a year later than expected due primarily to planning delays.Most of these sites were purchased unconditionally, ie without planningpermission, and, when permission is obtained, should increase in valuesignificantly. For development or trading properties no change in value is madeto the company's balance sheet even when open market values have increasedconsiderably. Naturally, however, the balance sheet will reflect the value ofsuch properties on their sale or subsequent to their development. The maximum value of our development properties will be realised by theirdevelopment. However, our policy continues to be to maximise investment indevelopment opportunities where at present investment returns are highest and,if cash resources become limited, to realise development sites or to release ourcapital through suitable financial structures to fund such developmentopportunities. The current year's results will continue to reflect the early stage of thedevelopment cycle as the first development site will not be completed this year.Our property values should continue to improve as planning changes should morethan outweigh any possible deleterious change in investment values orresidential plot values. The full outcome of the current financial year willdepend on any net change in valuation and the timing of any realisation ofdevelopment properties. The mid-market share price at 17 December 2007 was 175p a discount of 48.2p tothe NAV of 223.2p. The Board does not recommend a final dividend, but intends torestore the full dividend whenever profitability and consideration for otheropportunities permits. Conclusion The UK Economy is expected to experience a major deflationary shock resultingfrom an unprecedented contraction of credit. Simultaneously, strongerinflationary forces are becoming apparent primarily due to increased oil, foodand other commodity prices. The sub-prime crisis in the US is leading to a major rebalancing of the USeconomy with a lower $ exchange rate, a less unfavourable balance of trade and aredistribution of economic activity. This is likely to be achieved without arecession because of the expected accommodating stance of monetary and fiscalpolicy. Provided there is no US recession the UK economy should continue to grow, muchmore slowly early in 2008 than later in the year, a growth and recovery ratethat could be assisted by an adjustment of the aims of monetary policy. UK investment property appears over-priced as rental growth is likely to belimited, yields are likely to rise further and effective interest rates willcontinue to be high. Residential property seems likely to fall in price in theshort-term, but unless economic conditions deteriorate considerably, substantialprice falls are unlikely. In the long term, provided economic growth continuesand provided housing supplies continue to be allocated by rationing rather thanby price, prices will continue to rise. Neither current nor prospective economicconditions will detract from the opportunity of uncovering specific situationsfrom which substantial value can be created by effecting planning change. I D Lowe Chairman 18 December 2007 For further information please contact: Douglas Lowe, Chairman and Chief Executive Officer Tel: 0131 220 0416 Mike Baynham, Finance Director Tel: 0131 220 0416 David Ovens, Noble & Company Limited Tel: 0131 225 9677 Consolidated Profit and Loss Account for the year ended 30 June 2007 2007 2006 £ £ Income - continuing operationsRents and service charges 684,085 870,745Trading property sales 1,477,186 410,000Other sales 32,443 108,163Other operating income 130,615 - _______ _______ 2,324,329 1,388,908Operating costsCost of trading property sales (1,074,117) (304,500)Cost of other sales (51,289) (113,200)Administrative expenses (1,148,378) (992,992) _______ _______ (2,273,784) (1,410,692) _______ _______ Operating profit/(loss) 50,545 (21,784) Profit on disposal of investment property 15,569 189,729Bank interest receivable 59,050 151,329Other Interest Receivable 197,826 124,315Interest payable (567,143) (319,150) _______ _______ (Loss)/profit on ordinary activities before taxation (244,153) 124,439 Taxation - 5,070 _______ _______ (Loss)/profit for the financial year (244,153) 129,509 (Loss)/earnings per ordinary share (2.05p) 1.09p Diluted (loss)/earnings per ordinary share (2.05p) 1.09p Statement of Total Recognised Gains and Losses for the year ended 30 June 2007 2007 2006 £ £ (Loss)/profit for the financial year (244,153) 129,509 Unrealised surplus on revaluation of properties 642,250 1,978,506 ________ ________ Total recognised gains and losses relating to the 398,097 2,108,015financial yearPrior year adjustment in respect of recognition of - 178,244dividends payable ________ ________ Total gains and losses recognised since last annual 398,097 2,286,259report Note of Historical Cost Profits and Losses for the year ended 30 June 2007 2007 2006 £ £ Reported (loss)/profit on ordinary activities before taxation (244,153) 124,439Realised gain on previously revalued property 319,250 - ______ ______ Historical cost profit on ordinary activities before taxation 75,097 124,439 Taxation on profit for year - 5,070 ______ ______ Historical cost profit for the year after taxation 75,097 129,509 Historical cost loss for the year retained after taxation and (251,683) (167,564)dividends Consolidated Balance Sheet at 30 June 2007 2007 2006 £ £ £ £ Fixed assetsTangible assets:Investment properties 24,075,896 24,030,896Other assets 17,076 21,117 __________ __________ 24,092,972 24,052,013Investments 43,013 43,013 __________ __________ 24,135,985 24,095,026Current assetsStock of development property 10,766,629 7,034,258Debtors 538,947 968,314Cash at bank and in hand 823,967 2,203,611 _________ _________ 12,129,543 10,206,183Creditors: amounts falling due within one year (1,350,358) (2,177,356) _________ _________Net current assets 10,779,185 8,028,827 __________ __________ Total assets less current 34,915,170 32,123,853liabilities Creditors: amounts falling due after more than one year (8,400,000) (5,680,000) __________ __________ Net assets 26,515,170 26,443,853 Capital and reservesCalled up share capital 2,376,584 2,376,584Share premium account 2,745,003 2,745,003Capital redemption reserve 175,315 175,315Revaluation reserve 6,948,414 6,625,414Profit and loss account 14,269,854 14,521,537 _________ _________ Shareholders' funds 26,515,170 26,443,853 These financial statements were approved by the Board of Directors on 18December 2007 and were signed on its behalf by: I D Lowe Director Consolidated Cash Flow Statement for the year ended 30 June 2007 2007 2006 £ £ Net cash outflow from operating activities (3,079,424) (5,694,720) Returns on investments and servicing of finance (300,860) (34,896) Tax paid - (29,632) Capital expenditure and financial investment 607,268 5,814 Dividends paid on shares classified in shareholders' funds (326,780) (297,073) ________ _________ Cash outflow before management of liquidresources and financing (3,099,796) (6,050,507) Financing 1,720,152 3,572,183 __________ _________ Decrease in cash in period (1,379,644) (2,478,324) Reconciliation of net cash flow to movement in netdebt £ £ Decrease in cash in period (1,379,644) (2,478,324) Cash outflow from increase in debt (3,572,183) (1,720,152) _________ _________ Movement in net debt in the period (3,099,796) (6,050,507)Net (debt)/funds at the start of the period (5,172,659) 877,848 _________ _________ Net debt at the end of the period (8,272,455) (5,172,659) Notes to the cash flow statement (a) Reconciliation of operating profit/(loss) to net cash outflow from operating activities 2007 2006 £ £ Operating profit/(loss) 50,545 (21,784)Depreciation charges 6,072 4,682Loss on disposal of fixed assets 3,520 -Increase in stock of development property (3,732,371) (5,825,167)Decrease in debtors 429,367 50,246Increase in creditors 163,443 97,303 _________ _________ Net cash outflow from operating (3,079,424) (5,694,720)activities _________ _________ (b) Analysis of cash flows 2007 2006 £ £ Returns on investment and servicing of finance Interest received 256,876 275,644 Interest paid (557,736) (310,540) _________ _______ (300,860) (34,896) Capital expenditure and financial investment Purchase of tangible fixed assets (5,551) (866,776) Sale of investment property 612,819 915,583 Purchase of investments - (42,993) _________ _______ 607,268 5,814 Financing Debt due within a year: (Increase)decrease in short-term debt (152) 397,498 Debt due beyond a year: Increase in long-term debt (1,720,000) (3,969,681) __________ _________ (1,720,152) (3,572,183) (c) Analysis of net funds At beginning of Cash flow Other non-cash At end year changes of year £ £ £ £ Cash at bank and 2,203,611 (1,379,644) - 823,967 in hand Debt due after (5,680,000) (1,720,000) (1,000,000) (8,400,000) one year Debt due within (1,696,270) (152) 1,000,000 (696,422) one year __________ __________ _________ __________ Total (5,172,659) (3,099,796) - (8,272,455) Notes to the audited results for the year ended 30 June 2007 1. The above financial information represents an extract taken from the auditedaccounts for the year to 30 June 2007, which have been prepared under the basisof UK GAAP, and does not constitute statutory accounts within the meaning ofsection 240 of the Companies Act 1985 (as amended). The statutory accounts forthe year ended 30 June 2007 were reported on by the auditors and received anunqualified report and did not contain a statement under section 237(2) or (3)of the Companies Act 1985 (as amended). The statutory accounts will be delivered to the Registrar of Companies. 2. All activities of the group are ongoing. The board does not recommend thepayment of a final dividend in 2007 (2006: 1.75p). 3. Earnings per ordinary share The calculation of earnings per ordinary share is based on the reported loss of£244,153 (2006: profit £129,509) and on the weighted average number of ordinaryshares in issue in the year, as detailed below. 2007 2006 Weighted average of ordinary shares in issue during year - undiluted 11,882,923 11,882,923 Weighted average of ordinary shares in issue during year - fully diluted 11,882,923 11,882,923 4. The Annual Report and Accounts will be posted to shareholders on or around21 December 2007 and further copies will be available, free of charge, for aperiod of one month following posting to shareholders from the Company's headoffice, 61 North Castle Street, Edinburgh, EH2 3LJ. 5. The Annual General Meeting of the Company will be held at 61 North CastleStreet, Edinburgh, EH2 3LJ on Friday 18 January 2008 at 12.30 pm. This information is provided by RNS The company news service from the London Stock Exchange